Closed position definition
A closed position is a trade that is no longer active and has been closed by a trader. To close a position, you need to trade in the opposite direction to when you opened it.
For instance, if you take a long position on a stock, you will have to sell an equal amount of stock to close your position. Once a position is closed, it cannot be reopened. At the point of closure, any profit or loss is realized, and your account balance will be updated accordingly.
Closing a position is not always a manual task. Stop-loss and take-profit orders, for example, automatically close your position if a market’s price falls or rises to a certain level.
When should you close a position?
There’s no definitive answer to when you should close a position as it depends on several different factors. Your trading strategy, for instance, could be key in making that decision.
Timing when to close out a trade is a critical aspect of becoming a profitable trader. A common mistake made by inexperienced traders is closing out trades too soon if they start incurring a loss. Fluctuation and, depending on the market traded, volatility are frequent in the markets, so it’s not uncommon for a trade to enter the red. However, closing out too early and taking the loss can be a mistake as there’s no chance for the market to recover.
Equally, it can be difficult to close out a position when it’s up significantly. The mentality shifts and there’s that expectation that if it’s currently in profit, it will continue to rise further. Again, this is not always the case, so closing out positions and securing that profit is crucial to being successful.
The best way to close positions at the correct level is to make a trading plan. Before opening a trade, decide when you’ll close it at a profit and at a loss – then try to stick to your decision.